Timeline of Yes Bank debacle

In the latest developments in the YES Bank case, after the SBI led bailout plan is in process, the Reserve Bank of India has withdrawn its imposed moratorium on the bank. Normal banking operations will be now restored. Let us have a look at the timeline of the debacle that put Yes Bank in such a position.
Complete Coverage: Yes Bank

Crux of the Matter

Timeline of Debacle
Yes Bank’s stock had hit an all-time high in August 2018 with its market capitalisation crossing one lakh crore mark. However, its stock price began falling as the bank started looking for a new CEO after the RBI refused Rana Kapoor’s extension till 2021 and gave him time only till 31st January 2019.

Concerns started arising after the Chairman Ashok Chawla resigned on 11th January 2019 after his name came in the corruption charge sheet by CBI. This led to downgrading debt instruments of the bank by rating agencies with increasing uncertainty around Rana Kapoor’s successor.

Rana Kapoor stepped down in January 2019 and Ajai Kumar was made the interim CEO until the Head of Deutsche Bank India Ravneet Gill was appointed as the CEO on 1st March 2019.

In February 2019, the RBI reported that the bank’s risk assessment report has multiple lapses with regulatory violations and non-compliance with the SWIFT system. SWIFT is a secure financial messaging service and a SWIFT code is used to identify banks and financial organizations.

Yes Bank’s share prices reduced further when Former CEO Rana Kapoor put his entire 7.34 % stake against a loan. Later, he started selling his shares and took a complete exit from the bank by December 2019.

Fundraising Fallout
In April 2019, the board of the bank approved fundraising of $1 billion as it became highly important to control the losses which had reached Rs.1,507 crores in the fourth quarter of 2018-19. RBI appointed ex-RBI Deputy Governor R. Gandhi as the additional director of Yes Bank’s board with an aim to increase scrutiny of the bank.

Yes Bank reported a 91% drop in first-quarter profit in July 2019 with its gross bad loan ratio at 5.01%. CEO Ravneet Gill announced a deal to sell a minority stake to a tech company to boost its capital. In October 2019, Yes Bank got a binding investment offer of $1.2 billion from the Hong Kong-based global investor SPGP Holdings. Its stock surged by 39% after the news came out.

As the bad loan ratio further deteriorated to 7.39%, the bank reported its biggest loss in November 2019 and it announced its plan to sell shares worth $1.2 billion to Canadian investor Erwin Singh Braich and SPGP Holdings. But in January 2020, Yes Bank rejected Braich’s investment.

CEO Ravneet Gill, in a number of attempts to raise capital, only managed to get $270 million. In February 2020, the bank did not disclose its quarterly report and said it will be delayed by a month as it is in talks with potential investors.

As the deposit base reduced by 34% to Rs.1.37 trillion between 30 September and 5 March, RBI placed Yes Bank under moratorium and took over its board for 30 days with restricted withdrawals up to Rs.50,000 to protect depositors money.

ED’s Investigation
The Enforcement Directorate has registered a money laundering case against Former Yes Bank CEO Rana Kapoor and has summoned all major borrowers as part of the investigation into the financial irregularities. ED also raided Kapoor and his daughters’ residence in Mumbai and New Delhi. He was presented in the court on March 16 and his custodial remand was extended till March 20.

ED is investigating loans given to 44 companies belonging to 10 large business groups during the tenure of Rana Kapoor which now accounts for bad debts of Rs.34000 crores. The major borrowers include Subhash Chandra of the Zee Group, Sameer Gehlaut of Indiabulls Group, Jet Airways founder Naresh Goyal, Dheeraj and Kapil Wadhawan of DHFL group and Peter Kerkar of Cox and Kings, Anil Ambani of Reliance Group. They all have been summoned by the ED.

Initial investigation has revealed that about 78 companies owned by Kapoor’s family members were being managed by Rana Kapoor who is being interrogated for laundering funds from YES Bank to these companies. The ED also named his wife Bindu and three daughters as accused in the case.

ED summoned Kapil and Dheeraj Wadhawan of the DHFL group for a suspicious transaction worth Rs.4300 crores with the Yes Bank. They both are already out on bail in the Iqbal Mirchi case for diverting Rs.12500 crores to 80 shell companies by using 1 lakh fake borrowers. Essel Group has borrowed from Yes Bank Rs.8415 crores through its 16 firms; of that loan, some have turned NPAs.

The Enforcement Directorate has requested Dr. Subhash Chandra’s presence on 18th March 2020, to make a statement on the information which is already available with them. We wish to cite that all credit facilities availed were fully secured. The Group has never made any transactions with Mr.Rana Kapoor or his family.

– Essel Group

Indiabulls Real Estate and Indiabulls Housing Finance Ltd had borrowed Rs.5800 crores. According to the India Bulls statement, they have not received any summons from the ED and it has clarified that Indiabulls Housing has no term loans outstanding from Yes Bank. The ED has also summoned Reliance Group Chairman Anil Ambani who has reportedly borrowed the maximum Rs.12,800 crores from the cash-strapped Yes Bank. DHFL had borrowed Rs 4,735 crore, while Cox & Kings had borrowed Rs 1,050 crore. Cox & Kings has filed for bankruptcy and is in the process of the insolvency and bankruptcy code.

Bailout Plan
Cabinet approved the reconstruction scheme for YES Bank under which eight public and private banks led by State Bank of India will infuse capital into Yes Bank Ltd. The State Bank Of India will buy a 49% stake by investing Rs. 7250 crores and out of which it will have to maintain at least 26% shares for 3 years.

In the first round of funding, ICICI and HDFC Bank will invest Rs. 1000 crores (for 7.97% stake) each in Yes Bank as part of the RBI’s reconstruction plan. Kotak Bank, Axis Bank, RK Damani, Jhunjhunwala and Azim Premji Trust will be putting in Rs. 500 crores each.

RBI also decided to extend a loan of  Rs. 10,000 crores immediately under the special liquidity facility against government securities.

“Authorised capital has been raised to Rs. 6200 crores from Rs. 1100 crores to accommodate the immediate and subsequent increase in capital requirements. The RBI-appointed administrator will also vacate his office within 7 days after the notification and the new board will take full charge. The scheme will protect depositors’ interest, provide stability to YES Bank and a stable financial environment and banking system.”

– Nirmala Sitharaman, Union Finance Minister
Curiopedia

Rana Kapoor is the founder, and former managing director and CEO of Yes Bank. In February 1995, a team from Rabobank arrived in India, scouting for opportunities. Kapoor, his brother-in-law Ashok Kapur and Harkirat Singh made a proposal to the visiting team for two joint ventures: a non-banking financial company and a bank. During the next year, Kapoor held meetings with the Rabobank executives in India, Singapore and the Netherlands. The NBFC was set up in 1997, with the three Indian partners chipping in with an equity capital of Rs.9 crores each. In 2003, the three sold their stake for $10 million each, generating the seed fund for the bank. In 2003, the team was granted a banking licence by the Reserve Bank of India (RBI) to set up Yes Bank. They established Yes Bank with the vision of “Building the Best Quality Bank of the world in India” by 2015. More Info

Debate over Defaulters heats up in parliament

Enforcement Directorate’s (ED) probe into the Yes Bank crisis has unearthed names of big defaulters who had associations with the Bank. During a debate on defaulters in the Parliament, the opposition took a jibe at the ruling party, while the latter responded strongly to the critics.

Crux of the Matter

ED Unearths Big Names
While probing the Yes Bank and its co-founder Rana Kapoor, Enforcement Directorate (ED) has dug names of the recent defaulters. ED has issued summons to Reliance Group Chairman Anil Ambani, DHFL’s promoter Kapil Wadhwan, Essel Group Chairman Subhash Chandra, Con & Kings’ promoter Peter Kerkar, Jet Airways founder Naresh Goyal, etc. in the probe against Rana Kapoor for money laundering.

Anil Ambani was questioned by the ED regarding stressed loans that were sanctioned to Reliance Anil Dhirubhai Ambani Group (ADAG). Ambani filed an adjournment application and has sought more time. ED is probing into loans of over Rs. 20,000 crores for quid pro quo (a favor or advantage granted in return for something), irregularities, and diversion by Kapoor, who will be in ED custody till 20 March 2020.

These properties that were kept on mortgage were actually the illegal gratification, which Kapoor has received on advancing loans to entities without due diligence and were not in line with the Banking Regulation Act.

– Enforcement Directorate (ED) Official

Video Coverage: Demystifying the Yes Bank Crisis

RaGa Tries to Roar in Parliament
During the question hour session of the Parliament, the Congress leader Rahul Gandhi took a jibe at the ruling party and said that the government was not providing information on the top 50 wilful defaulters. He later said that asking questions was his right but was cut short by House Speaker Om Birla. In response, sources close to Birla said that Rahul Gandhi’s speech crossed the 12 PM mark and allowing him to continue would have been a violation of the House procedure.

Anurag’s Strong Reply
Minister of State for Finance and Corporate Affairs, Anurag Thakur replied to the question posed by Rahul Gandhi by saying that the list of the defaulters is available on the Central Information Commission’s website and is in the public domain. The list contains names of people who have a default amount over Rs. 25 lakhs.

Congress’ Adhir Ranjan Chowdhury said that Nirmala Sitharaman should be replying to the question posed by Rahul Gandhi. However, Speaker Om Birla said that the response to the questions posed in the question-hour session is given by a junior Minister. After the Speaker dismissed the Parliament at the noon hour, it witnessed a noisy ruckus and the Congress staged a walkout.

Curiopedia

Who is a Wilful Defaulter?
When you hear that someone has defaulted on a loan, the word default indicates that she was unable to repay the loan. A wilful defaulter is a person or a company that has failed to pay back the loan despite having the ability to repay it. As per RBI regulations, there are broad areas of wilful default: non-payment of dues despite a steady cash flow and net worth, misrepresentation of records, fraudulent transactions, siphoning off funds, etc. More Info

40% of Yes Bank NPA held by only 3 bankrupt companies

The Enforcement Directorate has stepped up its investigation in the Yes Bank crisis by probing prominent people related to the bank. Former MD Ranveet Gill was questioned by ED for several hours. Whereas, it has been figured that 40% of the bank’s NPAs belong to only 3 companies Reliance, DHFL, and Essel Group. You can read Summachar’s coverage on the Yes Bank crisis here.

Crux of the Matter

Quizzing Gill
After the arrest of Rana Kapoor, Enforcement Directorate (ED) found connections between Yes Bank and DHFL company. Therefore ED took custody of former CEO, Ravneet Gill and interrogated him for several hours. Department did not disclose any information related to interrogation. But people connected to it, have said that it was regarding the Rs. 3,700 crores investment made in bankrupted DHFL company. ED and Central Bureau of Investigation (CBI) have claimed that during the months of April-June in 2018, Yes Bank invested Rs. 3,700 crores in short terms debentures of DHFL company. Meanwhile, DHFL paid a kickback amount of Rs. 600 crores to a construction company owned by Rana Kapoor’s family. On the basis of FIR registered, ED has targeted the whole Kapoor family for investigations.

Runs With the Family
CBI has issued a lookout warrant against seven people related to the DHFL scam and Yes Bank crisis. The CBI, which registered a case on 7 March, released its charge sheet on Monday naming Kapoor, his wife Bindu Kapoor, director of RAB Enterprises Pvt. Ltd, and three daughters—Roshini Kapoor, Raakhe Kapoor Tandon, and Radha Kapoor Khanna, who are directors in Doit Urban Ventures (India) Pvt. Ltd and Morgan Credits Pvt. Ltd. Ranveet Gill, CMD of DHFL Kapil Wadhawan, and Dheeraj Rajneesh Kumar Wadhawan are also mentioned in the charge sheet.

Accusations on the Kapoor-Wadhawan Team
Kapoors and Wadhawans are accused of cheating, bribery and conducting criminal misbehave under the Indian penal code. Rana Kapoor’s daughter Roshni, who was boarding a flight to London, was stopped by the ED at Mumbai Airport. The probe has found that the firms linked to Kapoor’s family had few or no employees and hardly carried out any activity. Yet, these firms received huge loans at regular time intervals. ED has identified Kapoor’s properties in London and is carrying out a review of it.

Rana Kapoor obtained undue pecuniary advantage from DHFL through the companies held by his wife and daughters. Rana Kapoor also misused his official position in several other transactions and obtained illegal kickbacks directly or indirectly through entities controlled by him and his family members.

– CBI in its FIR

Case of 40% Bad Loans Held by Only 3 Co’s
The co-founder of Yes Bank, Rana Kapoor pilled up stress in the bank allegedly by having secret deals with Anil Ambai (Reliance Group), Kapil Wadhawan (DHFL) and Subhash Chandra (Essel Group). The bad loans of these 3 companies only mount to Rs 20,000 crores. This accounts for nearly 40% of all the bad loans of the Bank. Data on loan advances by the bank is quite shocking, as it’s loan book grew 80% in just two years between 2016-17.

Seating Amidst the Power
CBI and ED have also raised questions on Priyanka Gandhi Vadra who sold the portrait of Rajiv Gandhi made by MF Husain to Rana Kapoor for Rs. 2 crores. The image was gifted to Prime Minister Rajiv Gandhi by MF Husain. Conversations related to the deal of painting between Rana Kapoor and Congress Leader Milind Deora have surfaced as well.

This incident has sparked a political fight between Congress and Bharatiya Janta Party (BJP). BJP accused Gandhi family of protecting criminals and insulating their crimes in exchange for money. However, Congress replied to this by saying that BJP was digressing the public with the painting issue from the main issue of the financial crisis. Department is looking for a deep connection related to Yes Bank crisis.

Curiopedia

M. F. Husain – Maqbool Fida Husain better known as M. F. Husain was an Indian painter, regarded as India’s most prolific, controversial, and world-renowned artist. He was a modern Indian painter of international acclaim, and a founding member of Bombay Progressive Artists’ Group. Husain is associated with Indian modernism in the 1940s. His early association with the Bombay Progressive Artists’ Group used modern technique, and was inspired by the “new” India after the partition of 1947. His narrative paintings, executed in a modified Cubist style, can be caustic and funny as well as serious and sombre. His themes—sometimes treated in series—include topics as diverse as Gandhi, Mother Teresa, the Ramayana, the Mahabharata, the British Raj, and motifs of Indian urban and rural life. More Info

DHFL – In 2019, DHFL stopped payment of bonds and defaulted on its loan obligations. This caused its stock to fall over 97% and government intervention in the company. In August 2019, as efforts to draft a resolution plan by restructuring DHFL debt into equity, a few of the DHFL bondholders moved to the debt recovery tribunal, which could impact the resolution process. The company meanwhile offered to repay all investors in full with due process of inter-creditor-agreement.

In October 2019, the Enforcement Directorate conducted raids at several places of DHFL offices and promoter residences and found links of money laundering activity in loans given to firms closely linked to the promoters of the company. Additionally the trail of the loan given by DHFL to Sunblink real estate in 2010 lead to gangster Iqbal Mirchi, an accomplice of the organized crime mastermind Dawood Ibrahim. On January 27, 2020, the promoter of DHFL, Kapil Wadhawan was arrested under the Prevention of Money Laundering Act (PMLA). The arrest was connected to his firm’s alleged involvement in providing loans to the organized criminal enterprise of Dawood Ibrahim. More Info

Did RBI Not Listen to the Swan Song of Yes Bank?

India’s fourth-largest private sector bank, Yes Bank is witnessing a fallout because of the mounting Non-Performing Assets (NPAs) and mismanaged Balance Sheet. Rana Kapoor’s lending spree has now put the bank into the hands of RBI that has put a moratorium on withdrawal.

Crux of the Matter

Yes Bank was founded in 2004 by Rana Kapoor and Ashok Kapur when the Reserve Bank of India (RBI) was giving out banking licenses in the country. The commercial sector lender aimed at lending out to companies and sectors that were unable to acquire loans from elsewhere, adding high risk to its business model. As per many, the ‘Yes’ model helped the bank to grow exponentially.

With the focus on corporate lending and retail franchising, the bank declared its Initial Public Offering (IPO) in its debut year only. No sooner had the bank gained momentum, the co-founder of the bank, Ashok Kapur was killed in the 26/11 Mumbai Terror Attacks. The helm was now only in the hands of Rana Kapoor, who according to many was an aggressive lender. Yes Bank’s lending motto of ‘lending to the companies that no other bank lent’, proved to be fatal when non-performing assets (NPAs) and credit-deposit ratio started to show weakness.

The Beginning of the End
2014 could be marked as the year that was the beginning of the end for the corporate lender. Yes Bank Advances bubbled from Rs. 55,000 crores in FY14 to Rs. 2,41,000 crores in FY19. The Advances in FY19 were nearly 330% of that in FY14 – highest among comparables like HDFC, Axis, Kotak, ICICI, and SBI.

This, in turn, led to a rise in the number of defaulters. Yes Bank that once proudly said that it was below 1% NPAs, in September 2019 stood at 7.39%, worst among comparables. It had advanced loans to many companies like DHFL, IL&FS, Jet Airways, Cafe Coffee Day, Anil Ambani’s Reliance Group, Cox & Kings, etc. that suffered through the tough market and internal situations in recent.

A bank usually needs to provide for the defaults. A sufficient amount needs to be set aside as Provision in case of a bad loan. Yes Bank failed to have ample provisions for the ballooning bad loans. Its Provision Coverage Ratio was only 43.1%. Whereas, RBI recommends a 70%+ PCR.

One of the reasons that can be attributed to the low amount of provisioning could be the declining growth of deposits in the bank. The Credit-Deposit Ratio (CDR) – the ratio of loans advanced to deposits received – is one of the yardsticks of a bank’s performance. In 2014, Yes Bank’s CDR was among the industry’s lowest at around 70%, whereas in 2019 it was 106%. It means that the bank received only Rs. 100 deposit for every Rs. 106 it lent.

Its profitability began to dip because of the above-mentioned. In 2016, the bank wanted to raise capital through Qualified Institutional Buyers but it canceled the plan. Among other banks, RBI put Yes Bank under the scanner to see whether it was reporting NPAs properly. According to the Outlook Business Report, in FY16 it under-reported its NPAs at Rs. 749 crores. The bad loans amounted to a gigantic Rs. 4,900 crores in that period.

Reserve Bank of India also insisted Rana Kapoor to step down as the CEO & MD. In March 2019, Rana stepped down and Ranveet Gill took office. Many are also raising the question of why the RBI did not intervene when the Advances shot up year after year and when it knew Rana’s lending spree behavior.

Revival Plan
RBI, in order to safeguard the interests of all the stakeholders, put a moratorium on the withdrawal of amount of Rs. 50,000 till April 3, 2020. Depositors cannot withdraw on an aggregate of more than Rs. 50,000 till the moratorium ends. RBI in a draft revival plan also announced that public-lender State of India (SBI) might purchase a 49% stake in Yes Bank. SBI will infuse around Rs. 11,760 crores. Furthermore, SBI will not be allowed to reduce its stake to less than 26% for 3 years. RBI said that all the existing employees of the bank would retain their positions except a few ‘Key Managerial Personnel’ may be removed.

As per RBI’s Yes Bank Limited Reconstruction Scheme 2020, all the securities that are a part of the Additional Tier 1 Capital (AT-1) will be written down permanently. Its bondholders are mulling over filing a case against RBI’s revival plan. The AT-1 issued under Basel III norms has the following terms, “The write-down of common equity tier-I capital shall not be required before a write-down of any additional tier-I capital.” This lays down an exception that these bonds would absorb losses before Tier-1 equity of the bank. Investors are worried whether RBI’s move is an economically viable one as this move would wipe out bond investment value while maintaining the equity value. But this concern contradicts the law.

Rana Arrested
Former MD and CEO Rana Kapoor was arrested by Enforcement Directorate under the Prevention of Money Laundering Act (PMLA). He is accused of receiving many benefits for disbursing loans to companies in a critical situation. One of the cases accuses him that one of his family ventures received Rs. 600 crores in exchange for a non-repayment of loans from bankrupt-DHFL.

ED also probed Rana for the MF Hussain painting he bought from Priyanka Gandhi worth Rs. 2 crores. He possesses many such exquisite paintings with him. However, he usually took valuation certificates from experts but he did not take one for this painting.

Curiopedia

Basel IIIis a global, voluntary regulatory framework on bank capital adequacy, stress testing, and market liquidity risk. This third installment of the Basel Accords was developed in response to the deficiencies in financial regulation revealed by the financial crisis of 2007–08. It is intended to strengthen bank capital requirements by increasing bank liquidity and decreasing bank leverage.

As part of the norms, economic output would be mainly affected by an increase in bank lending spreads, as banks pass a rise in bank funding costs, due to higher capital requirements, to their customers. To meet the capital requirements originally effective in 2015 banks were estimated to increase their lending spreads on average by about 15 basis points. Capital requirements effective as of 2019 (7% for the common equity ratio, 8.5% for the Tier 1 capital ratio) could increase bank lending spreads by about 50 basis points. The estimated effects on GDP growth assume no active response from monetary policy. To the extent that monetary policy would no longer be constrained by the zero lower bound, the Basel III impact on economic output could be offset by a reduction (or delayed increase) in monetary policy rates by about 30 to 80 basis points. More Info